The origin of forex trading can be traced back to the ancient period. Exchange of currency and trading has allowed people to buy and sell goods such as pottery and farm produce. If the currency of one land held more gold either because of the content of the metal or its size, then a merchant could exchange a fewer number of these for a larger number of lesser valuable currency or even a large amount of material goods.
WHAT IS FOREX?
Forex is an acronym for 'foreign exchange'. Forex market is a place where different currencies are traded. Any foreign currency is important because it has to be exchanged to conduct business or trade across borders. In the forex market, one can buy any currency of his choice while simultaneously selling another one. It doesn't determine the relative value of one currency with respect to another, but it fixes the market price of the value of a single currency based on the demand for another. The forex market is the largest and the most liquid financial market in the world with daily turnover in the range of over five (5) billion US dollars. The forex market is an OTC market, one without any central market in which the trader exchanges the currency that is sold for the currency that is bought. All the transactions take place via electronic networks sometimes with the help of online forex brokers.
HOW DOES FOREX WORK?
Currencies are usually traded in Pairs: USD/JPY, EUR/USD etc. the most liquid currencies are traded by individuals as a means of making money. The major currencies that are traded include US dollar, British pounds, Euro, Swiss franc, Japanese yen, Canadian dollar, and Australian dollars. A small part of the currency trade happens when companies buy and sell products in foreign Lands; some companies also convert profits from their operations abroad to domestic currencies. The forex market works at several levels consisting of financial institutions, banks and deals.
METHOD OF FOREX TRADING
There are three (3) methods in which individuals, institutions and corporations conduct forex trades: spot market, forward market and future market. The spot market is the largest and the future and forward markets are the derivative markets.
WHY TRADE FOREX?
1. Forex market is open for 24hrs in a day and it allows trading of major currencies at one's convenience even from the comfort of your home.
2. You can go long or short and can make money at any time when the market is open.
3. The cost of trading currencies is low as most forex brokers do not charge any kind of commission this is because the cost of trading currencies is built into the spread difference between the buying and the selling price.
4. Availability of leverage is one of the key alterations of the forex market as it helps you to maximize profit. This means that you can invest more money than the amount you deposited into your account for trading purposes; it has the potential of blowing up your losses as well.
5. You can enjoy the benefits of margin based trading which enables you to earn more profits by investing less of your own funds.
IMPORTANCE OF BROKERS IN FOREX TRADING
1. They provide real-time quotes and advice you on what currency to buy, when to buy and the right time to sell it based on news feeds.
2. They would pass your orders to a liquidity provider such as a bank or a financial institution.
3. The brokers often provide you with data from varied trading platforms.
4. They provide you with substantial leverage.
FOREX TRADING TIPS
- Understand requirements completely.
- Set financial goals and develop strategies.
- Choose the right broker.
- Choose the correct account type and leverage ratio.
- Replenish investment with organic profits.
- Start with a single currency pair.
- Trade only when you have full knowledge of the trade.
- Do not rely on forex robots.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.